Select Committee on Environmental Audit Second Report






Since the Department last submitted a memorandum to the Committee, two developments have taken place.

2.  On 26 November 1998, the World Trade Organisation Working Group on Trade and Investment met in Geneva. The group agreed to recommend to the WTO General Council that its life should be extended, but that this should be without prejudice to any future decision by the General Council regarding preparations for a new Round. The effect of this is to enable the valuable discussions that have been taking place in the group to continue, while leaving open the option of whether WTO Ministers may wish to mandate negotiations on investment in future. A further meeting of the group subsequently took place on 22-23 March 1999.

3.  On 3 December 1998, representatives of those countries who had been negotiating the MAI (minus France) met in Paris for informal consultations. Following this meeting, the OECD Secretariat issued the following statement:

"Negotiations on the MAI are no longer taking place. However, the officials agreed on the importance of multidisciplinary work on investment at OECD. There are a number of important issues on which further analytical work and inter-governmental co-operation are needed. The officials agreed that this work should be carried out in a transparent manner and should involve all OECD members as well as interested non-member countries, including those that participated as observers to the negotiations. The officials reaffirmed the desirability of international rules for investment".

4.  The Committee's report makes a number of references to "a future MAI". The Government's preference is to avoid such terminology. Any future international investment agreement is likely to be very different from the MAI,. And the continued use of the term may cause unnecessary confusion.


i)  We conclude that OECD governments, including the previous UK administration, failed to ensure that the MAI process reflected commitments on sustainable development and the integration of the environment in policy-making made in 1992, at Rio, and thereafter. (Paragraph 17)

ii)  The new UK Government reversed the UK's negotiating stance on environmental concerns but did not take the view that the lack on environmental appraisal was a fatal flaw in the negotiating process. (Paragraph 18)

5.  In May 1997, incoming Ministers took the view that the treatment of these issues had been unsatisfactory to date and that the line taken by the UK on the subject of environmental protection needed to be changed. It was in the light of this policy change that the UK proposed an environmental review of the MAI. The Government remains of the view that good progress was being made towards addressing these issues in the context of the MAI negotiation, although we accept that uncertainties remained which would have needed to be addressed had MAI negotiations been resumed in the autumn of 1998.

iii)  The UK's contribution to the environmental review of the MAI was criticised by the NGOs in that its output was half a page of text without supporting facts or analysis and its conduct had not been open to their participation... We were surprised and concerned to learn that the Environment Agency had not been directly involved in this review. (Paragraph 20)

6.  The UK's contribution to the environmental review of the MAI took place against the background of DETR's expertise in regulatory law, policy development and enforcement and close contacts with environmental NGOs. The UK's policy was that it would be unacceptable for the MAI to detract from the powers of domestic regulators (including the Environment Agency) to carry out normal, non-discriminatory and transparent regulation. The Government would not have signed an MAI that did not address t5his issue in a satisfactory way. The Environment Agency subsequently participated in a meeting with Ministers on 26 November 1998 to discuss the way forward after the MAI.

 iv)  We conclude that international agreements on issues such as trade, investment, employment standards and environmental protection should be the subject of focussed negotiations in appropriately expert fora. However, we regard it as imperative that in these fora the relationships between the proposals under discussion and other initiatives, whether existing or in development, are fully analysed from the outset. Such analyses must look both at the risks of conflict and the opportunities for confluence. (Paragraph 25)

7.  We agree.

v)  We conclude the draft MAI posed a serious risk to the conduct of environmental regulation and we note that the Government's assessment supports this conclusion. We further conclude that, due to the failure of negotiations to consider these issues from the start of the process, the proposals tabled to address this risk were inadequate. (Paragraph 32)

8.  The Government's view was that there was no inherent reason for conflict between environmental regulation ion the one hand and the principles of non-discrimination that lay at the heart of the MAI on the other. The UK's statement of this, which was submitted to the OECD in March 1998, found no UK environmental laws which discriminated de jure on the basis of an investor's nationality (this reflected the UK's overall non-discriminatory approach). However, it identified a risk that the UK's environmental regulators might be accused of doing so in the context of individual regulatory decisions. The Government does not share the Committee's view that the failure to consider this issue at the outset of negotiations made the search for a solution impossible. Following the fuller consideration of these issues prompted by the UK's review proposals, there was a widespread recognition among negotiators of the need to solve this problem, and it is our opinion that a solution could have been found that would have been acceptable to all parties.

vi)  We regard the lack of even an agreed UK position on how to address the relationship between the MAI and MEAs as a serious omission at such a late stage in negotiations. (Paragraph 34)

9.  The issue of possible conflict between the MAI and MEAs was inextricably linked to the issue of possible conflict between the MAI and domestic regulation in general (not just environmental regulation). So it was not possible to solve the MEA issue in isolation when the text had not been settled in certain key respects. However, it was clear that many EU and other colleagues shared the Government's commitment to finding a solution before any MAI could be concluded, and we were working intensively on solutions when negotiations ceased.

vii)  We recommend that environmentally responsible foreign investment be encouraged by the inclusion, in any future MAI, on incentives or obligations for companies to follow best practice in the management of their environmental impact. (Paragraph 39)

10.  The Government shares the Committee's view that it is desirable for UK firms to observe high standards of behaviour when investing overseas. Evidence suggest that many British companies are observing standards well beyond those that they are obliged to adhere to. We seek to give support and encouragement to voluntary measures taken by firms to this end in areas such as reporting on their environmental performance and the use and transfer of environmentally-friendly technology. The UK is participating in the review of the OECD Guidelines for Multinational Enterprises, which set out the firm expectation of member governments as to how their investors should conduct themselves overseas. The issue of encouraging compliance with the Guidelines- both when the host Government itself subscribed to the Guidelines and when it does not- is one of the key issues being addressed in the review.

11.  However, the Government sees the insertion of binding obligations on companies in an international investment agreement a problematic. We take the view that it si for host countries- subject to any international commitments that they have entered into- to specify the standards of environmental protection that they require of companies operating on their soil (including foreign investors) and to enforce these standards. We do see merit however in seeking agreement to strong environmental provisions being included in the Guidelines for Multinational Enterprises being negotiated within OECD, and we are pursuing this. In addition, we will continue to support efforts to improve environmental management and standards of enforcement in developing countries.

12.  The Committee's report makes a specific mention of possible linkage being environmental standards and export credits. This issue is currently under discussion by the Export Credit Guarantee Department and its OECD counterparts.

viii)  We were deeply concerned over the number of questions raised by the environmental review; the content and status of the March 1998 environmental proposals; and the lack of agreement, even within the UK Government, on how the relationship between the MAI and multilateral environmental agreements might be addressed. (Paragraph 41)

ix)  The MAI appears to us to stand as a prime example of the failure of the bolt-on approach to addressing the economic, environmental and social impacts of policy. (Paragraph 42)

13.  See our answers to recommendations (i), (v) and (vi) above.

x)  We conclude that global issues require global negotiations. The participation of developing countries in negotiations on an MAI is required for the establishment of a genuine consensus. Such a consensus can be built upon, while anything less will only store up problems for the future. (Paragraph 51)

14.  We agree that it would be desirable to include developing countries in a future international investment negotiation. We are continuing to support UNCTAD's programme of analysis and capacity-building to help developing countries participate in discussions on international investment. The fir5st six of a series of UNCTAD technical papers on issues in international investment agreements were published earlier this year.

xi)  We regard the swell of public opinion against the MAI to have been assisted by the failure of the Government to:

  • exert a demonstrable grip on the process;
  • reassess and state the problems that the MAI was intended to address, the benefits that it was intended to confer, and the risks that it involved; and
  • provide time for appropriate Parliamentary discussion, including debate in Government time, on the issues involved in the light of the emerging concerns of backbenchers on all sides of the House. (Paragraph 59)

15.  We accept that the Government was unable to persuade all elements of British public as to the merits of MAI. There remained scepticism in some quarters as to whether a legal framework for foreign investment based on the principle of non-discrimination was strictly necessary. There was also a perception that MAI would have had undesirable consequences- both direct and inadvertent- both for the UK and for the wider world.

16.  We do not accept this stemmed from a lack of political input or lack of inter-departmental coordination. Since May 1997, Ministers in DTI, DETR and DfID in particular, all took a close interest in the progress of MAI negotiations and received regular reports from their officials, thereby ensuring that the UK delegation to negotiations was pro-active in raising key issues.

17.  The Government's view is that the MAI received substantial Parliamentary scrutiny as the negotiations progressed. In particular, the MAI negotiation had been under scrutiny by the House of Commons European Scrutiny Committee since March 1997, a process that included oral evidence from the then Parliamentary Under Secretary of State, DTI (Mrs Barbara Roche MP). However, Government never ruled out calling a full debate on floor of House in Government time if the right moment had arisen.

xii)  In the light of the difficulties encountered at the OECD we believe that the Government should first reassess what are its objectives and priorities in pursuing an MAI. (Paragraph 62)

18.  We agree that it is important for the Government collectively to assess its objectives and priorities with regard to any future investment negotiation. We are in regular contact with the various non-Government groups in UK who have an interest in this matter. We are also in discussion with their international counterparts both in EU and beyond to determine what might be negotiable. The Secretary of State for International Development chaired a roundtable discussion on international investment rules on 8 March1999, involving developing country representatives, investors, NGOs, academics and international organisations.

xiii)  As regards the process of negotiation, we would regard key principles that the UK should press for to be:

  • the full participation of developing countries;
  • the inclusion of environmental appraisal from the start of any preparatory work;
  • an open process, benefiting from the input from the wider policy community and civil society, and
  • transparent, with regular and full reporting on progress on the identified objectives, benefits and risks. (Paragraph 64)

19.  We agree that developing countries should be fully involved in future negotiations, and that the promotion of SD world-wide (including addressing environmental concerns) should be central to the thinking of negotiators from the outset. It is Government's policy to press for maximum of openness and transparency in trade and investment discussions, consistent with need to preserve scope for government to government negotiations.

xiv)  As regards the substance of negotiation, we conclude that the key environmental issues to be addressed are:

  • the ability of governments to develop and implement environmental regulation with due regard to the principles of precaution and polluter responsibility;
  • the encouragement, in line with current trends, of environmentally, and socially responsible business practices in balance with the level of rights and recourse afforded by any new arrangement;
  • the ability of developing countries to implement effective national sustainable development strategies; and
  • the ability of governments, collectively to develop, and individually to implement, multilateral environmental agreements. (Paragraph 65)

20.  We agree, although we would stress need to work on basis of consensus involving all those present at the negotiating table. DfID will continue to support development and implementation of National Sustainable Development Strategies to help ensure the proper integration of environmental, social and economic considerations in developing countries. The UK with the European Commission has taken the lead in work on these strategies in the OECD environment and development working groups.

xv)  We believe that the negotiation of any MAI by the WTO should not, at this stage, be regarded as a foregone conclusion. We regard the proper sequence to be, as suggested above, the identification of the appropriate scope for any new negotiation and its general aims and objectives, and then the identification of the most appropriate forum—rather than the other way round. (Paragraph 68)

21.  The UK Government's view is that the establishment of a liberal, rules-based framework for foreign investment, grounded in the principles of non-discrimination and transparency, could deliver considerable benefits both for UK investors and for the world economy as a whole. Developing countries stand to benefit from a more stable climate for investment, which such a framework would help create. The UK, together with its EU partners, has called for a comprehensive new Round of negotiations to begin in the WTO next year, and we think that investment should be one of many items on the agenda. The WTO already deals with investment issues through the General Agreement on Trade in Services (GATS) and the Trade Related Investment Measures (TRIMs) agreement.

22.  However, the UK's support for an investment negotiation in the WTO must be clarified in two respects.

a)  We expect that any framework of WTO rules on investment would look very different from the MAI. It will have to be acceptable to all members of the WTO, and their presence at the table will make for a completely different negotiation.

b)  We do not see the WTO as the only forum in which to address investment-related issues. The Government is seeking to make progress on these issues in all appropriate international fora and will play an active role in the work of the UN Commission on Sustainable Development on the cross sectoral theme of financial resources/trade and investment/economic growth in the year 2000.

xvi)  Wherever, if anywhere, a negotiation takes place we recommend that particular attention should be given at the outset to setting up the negotiation in a way that ensures environmental and social issues are considered on an equal footing with other concerns, and that appropriate participation is secured from the start. (Paragraph 70)

23.  It is the Government's objective to ensure that all international institutions work in a mutually reinforcing way. We are contributing actively to the work of the WTO Committee on Trade and the Environment, whose remit is to examine the relationship between trade rules and the environment and, if necessary, to make recommendations on the need to change any trade rules.

xvii)  In any new negotiation on investment that gives adequate attention to environmental and social aspects it will be important to clarify the responsibilities of different European institutions at the outset, and to establish appropriate machinery for ensuring that European negotiating positions took full account of environmental and social aspects after an open consultation process. (Paragraph 72)

24.  We agree. We welcome the recent decision by the European Commission to carry out a sustainability study of the EU's agenda for the new Round.

xviii)  We urge that the Government take these ideas, as well as our earlier conclusions and recommendations, into consideration in preparing the ground for any further development of a framework for international investment. IN the light of the OECD experience it is clearly important that Parliament is kept informed as to progress on these issues and given the opportunity to express its opinion before binding decisions are taken. (Paragraph 73)

25.  We agree.

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